As the aging of the Canadian population progresses over the next decade, RRSP contributions will likely continue to decline through 2020, according to an RBC Economics study based on RRSP contribution trends in Canada over the past 40 years.
"For three decades starting in the late 1960s, RRSP contributions grew steadily. Then they shifted downward in the late 1990s and continued to fall through to 2008 as boomers got older and contributed less," says Paul Ferley, assistant chief economist, RBC. "This downward trend doesn't necessarily mean Canadians aren't saving enough for retirement; but decreased savings can negatively impact the overall Canadian economy by making less funds available to finance investment activity."
The RBC report found that RRSP contributions, as a share of personal income, have declined over the past 11 years after steadily rising to a peak in 1997. The study concludes that the boomer "bulge" and distinctive savings patterns in each age group (34 and under, 35-44, 45-54 and 55 and over) can explain the majority of both the growth in RRSP contributions prior to 1997 and the drop off seen since.
The savings pattern for various age groups is quite distinct with those aged 34 and under the least likely to make RRSP contributions. The biggest increase in contributions occurs when individuals move into the 35-44 age group followed by a smaller rise going into the 45-55 age bracket. Contributions start to move lower after age 55.
RRSP contributions over the past 40 years have risen and fallen in step with the demographically significant boomer generation moving through the decades until the late 1990s.
"The large number of aging boomers will likely be a key factor in overall RRSP contributions continuing to drop over the next 10 years barring any dramatic change in savings behaviour," says Ferley.
"The age group with the biggest savings challenge is the 35-54 age group," says Lee Anne Davies, head, retirement strategies, RBC. "They're raising families, buying homes and saving for children's education, but this time is also critical for building a secure retirement future. We want Canadians to be financially prepared for retirement and to achieve their financial priorities, which is why having a plan is important. Planning wisely can make it possible to meet the many competing financial priorities while also saving for retirement."
Ferley notes that several other factors affect RRSP contribution levels, including:
- Personal income: During periods of economic slowdown and weakening incomes, the pace of growth in RRSP contributions declines.
- Health of equity markets: Individuals contribute more to RRSPs when the TSX rises.
- Contribution limits: This impacts RRSP contribution levels although the effect seems to be waning in recent years.
Click here to view the complete RBC Economics RRSP study online.